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REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE 8

INTRODUCTION

1. The Securities Commission's Financial Reporting Surveillance Programme (FRSP) is an ongoing surveillance programme. This report sets out findings from the Commission's Cycle 8 of its FRSP.
2. Appendix 1 sets out the background to the Commission's FRSP, including how issuers are selected for review and how matters are dealt with when identified.

CYCLE 8: FINDINGS

Scope and issuer selection

3. In Cycle 8 the Commission reviewed the annual reports of 40 issuers with balance dates from 30 September 2007 to 30 June 2008.
4. The 40 issuers were made up of:
   1. 25 issuers listed on the main board equity security market (NZSX) of NZX Limited (NZX);
   2. 3 issuers listed on both the NZSX and the debt security market (NZDX) of NZX;
   3. 9 issuers listed on the alternative market (NZAX) of NZX;
   4. 1 issuer listed on the Unlisted exchange; and
   5. 2 issuers whose shares are not listed on any exchange.
5. In Cycle 8 no overseas or dual listed issuers were selected for review. Similarly, no issuer from the previous cycle was reselected for review. The Commission reviewed two financial institutions.
6. This is the first cycle of review in which all issuers selected applied NZ IFRS in the preparation of their financial statements.

Overall comments on Cycle 8

7. The Commission considers that issuers' compliance with NZ IFRS is satisfactory. Compared to previous cycles the number of matters raised and other matters in Cycle 8 were significantly higher. This resulted mainly from the many challenges confronting issuers on transition to NZ IFRS.
8. The Commission appreciates that issuers have put much effort into the transition to NZ IFRS. The Commission also recognises NZ IFRS contains many more demanding and detailed requirements. As NZ IFRS is new to many issuers, the Commission took the opportunity to highlight common areas of non-compliance with NZ IFRS or unclear disclosures. This is to ensure that issuers continue to raise the quality of disclosures and the standard of compliance with NZ IFRS.
9. Our level of findings on matters raised suggests that issuers still have some work to do in respect of financial reporting disclosures. Notwithstanding this, investors should be reassured that, of the matters already dealt with, there were no matters raised that the Commission considered were significant enough to warrant taking enforcement action or making a referral to any other appropriate body.
10. Thirty-five of the 40 issuers' annual reports reviewed contained matters that prompted the Commission to write to the issuers In writing to the issuers on the 96 matters raised, the Commission also drew the attention of those issuers to 53 other matters.
11. The Commission wrote to 12 issuers on substantial security holder matters, to 7 issuers on directors' disclosures and to 7 directors about their obligations to lodge notices with the issuer and NZX within 5 days of the acquisition or disposal of relevant interests in the issuers.
12. The Commission wrote to 3 audit firms about services, other than audit services, that they had provided to the issuers.

Outcome of matters raised

13. Table 1 shows the outcome of matters raised in Cycle 8.

14. As in previous cycles, the Commission notes that the responses from issuers explained and clarified many of the matters raised, and the high percentage of agreement reached with issuers based on the initial letter from the Commission is pleasing.
15. However, as the Commission has previously stated, in many cases writing to the issuers may well have been unnecessary had the issuers made better disclosures. The Commission reminds issuers to ensure that all disclosures are sufficiently transparent, complete and coherent to explain matters included in their financial statements.
16. The Commission will follow up and review the next annual reports of the issuers to ensure that matters raised with them previously have been taken into account.

Specific comments on Cycle 8 findings

17. The Commission, through its news releases at the end of 2008⁴ , highlighted to issuers the areas of interest to the Commission in the context of the current economic environment. The Commission is keen to ensure that all relevant aspects of NZ IFRS are understood and considered by issuers in the preparation of their financial statements, particularly in these difficult economic times. Issuers were alerted to the following areas of interest to the Commission:
    1. significant management judgements;
    2. fair market values;
    3. impairment of asset values;
    4. goodwill and intangible assets;
    5. financial instruments;
    6. the going concern assumption;
    7. related party transactions;
    8. classification of debt; and
    9. cash flows.
18. Many of the areas of focus and attention set out in the 2008 News Releases continue to be of interest to the Commission and of relevance in the current economic environment.
19. In discussing the Cycle 8 findings the Commission's focus is on providing timely feedback and information to issuers in the preparation of their next set of NZ IFRS financial statements⁵.
20. In Cycle 8 the matters that were raised with issuers related mainly to:
    1. valuation and fair values;
    2. intangible assets;
    3. impairment of assets;
    4. definition and classification of cash flows;
    5. financial instrument disclosures;
    6. related party information and key management personnel compensation;
    7. management judgements and estimates;
    8. statement of compliance with IFRS; and
    9. market matters.

Footnotes

3. The matters raised exclude the instances where the Commission had written directly both to the audit firms (3 instances) and to the directors of issuers (7 instances).
4. See the Commission's News Releases dated 4 September 2008 and 11 December 2008.
5. In this context, references to standards and legislation in this report refer to the most recent equivalent paragraph or section, notwithstanding that an earlier version of the standard or legislation may have been applicable at the time of writing to the issuers.